United States

IRS provides audit guidance on certain international return penalties

TAX ALERT  | 

The IRS recently released new international audit guidance, IGA/C/17_03_01-2, aimed at helping auditors define the meaning of ‘substantially complete’ as it relates to international information return penalties. This concept unit, as it is referred to by the IRS, provides auditors with an overview of the substantial compliance doctrine, as well as analysis of other informal IRS guidance on substantially complete international information returns. The guidance goes on to provide auditors with working examples focusing on the requirements for a substantially complete international information return.

Generally there are two standards that apply when determining whether a tax return satisfies a reporting requirement or whether a taxpayer has complied with a statutory or regulatory requirement: strict compliance and substantial compliance. Certain international information returns are required to be substantially complete in order to avoid penalties associated with incomplete or untimely filing. In addition to monetary penalties (up to $10,000 per form per year in some cases), failure to file or substantially complete these forms can also result in an extended statute of limitations on assessments. While the term substantially complete has not been defined by the courts, the new guidance points out that the substantial compliance doctrine can be used to indicate how a court may determine if an international information return meets the substantially complete requirement as it relates to international information return penalties.

This new guidance provides auditors examining U.S. entities with foreign ownership or foreign-owned U.S. business with a detailed analysis of the substantial compliance doctrine and goes on to aid auditors in making the determination of whether an international information return is substantially complete as it relates to international information return penalties. In addition, the guidance points auditors to other informal IRS guidance, such as Field Service Advice and Chief Counsel Advice, for additional information on substantially complete international information returns. Finally, the concept unit provides several working examples and corresponding analysis for auditors to use as references when assessing whether an information return is substantial complete.

While the substantial compliance doctrine and term substantially complete are nothing new in themselves, this recent informal audit guidance by the IRS does provide a detailed look into the IRS’ view of the relevant authority governing these standards. In addition, this guidance underscores the importance the IRS has placed on complying with international information return reporting requirements.

United States taxpayers with foreign connections and foreign-based multinational enterprises with U.S. business, should be sure to consult their tax advisors regarding the special tax filing rules for these operations, as failure to file or substantially complete the appropriate international information returns may result in substantial penalties.

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